Pre-issue Management Prepar ation of p rospectus, selection of bank ers, issue pricing , advertising, consultants etc. SESSION - 10
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Pre-issue Management
Preparation of prospectus, selection of
bankers, issue pricing , advertising,
consultants etc.
SESSION - 10
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Preparation of prospectus
section 55 to 68 Aof the Companies Act deal with the issue of prospectus.
Section 2 (36) defines a prospectus as any documentdescribed or issued as prospectus and includes any notice.circular, advertisement or other document inviting depositsfrom the public or inviting offers from the public for thesubscription of purchase of any shares in or debentures of acompany.
In July 1995 Malegam committee recommended stricterregulations to curb irregularities affecting the primarymarket.
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Preparation of prospectus
Based on the recommendations SEBI issued guidelines to
cover enhanced transparency in the draft prospectus filed
with SEBI .
The draft prospectus filed with SEBI was made a publicdocument to enhance transparency.
The lead merchant banker shall simultaneously file copies of
draft document with Ses where the issue is proposed to be
issued.
Every prospectus submitted for vetting shall ,in addition to the
requirements of schedule II of Companies ACT contain, specify
the following.
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Preparation of prospectus
a) Details of actual expenditure incurred on the project.
b) Means and source of financing and year wise break up of
proposed project expenditure.
c) The turnover in the P&L statement should be bifurcated intomanufactured products and traded products.
d) The companies undertaking major expansion must give
details of technology, market, competition,managerial
competence and capacity build up.
e) Projection of future profits allowed by a new
company/existing company.
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Preparation of prospectus
f) details of aggregate shareholding of the promoter group and
their directors
g)Aggregate of securities purchased/sold by the promoter group
6 months preceding filing of prospectus.h) The maximum /minimum price sales/purchases mentioned
i) If not possible to get information a statement to that effect
should be made in the prospectus.
j) Management perception of internal and external risk factorsand management analysis of financial condition and results
of operations as reflected in the financial statements.
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Preparation of prospectus
a) SEBI notified (15.5.1995) that Rights issues not accompanied
by public issues three months prior to subsequent to date of
rights issue were not required to be vetted by SEBI.
b) SEBI removed ( 1.3.1996) the vetting requirement forexclusive NCD issue with certain conditions.
c) A prospectus is to be dated and it will be the date of
publication. It has to be signed by directors or their
authorised agents.
d) Registration of prospectus ( sec.60).The prospectus has to be
registered with ROC by delivering a copy before issue.
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Preparation of prospectus
The copy of the registration must be accompanied by
I. Consent of the experts to the issue
II. Copy of the contract fixing compensation of MD or manager.
III. A copy of every material contract except those entered intoordinary course of business
IV. Consents of auditor. legal advisor ,attorney, solicitor,bankers
broker of the company to act in that capacity
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Contents of prospectus
Prospectus should disclose all material and essential factors
about the company to the intending purchasers of shares.
1. Main objects of the company and particulars about
signatories to the memorandum and no.of shares owned bythem.
2. No.of classes of share.
3. No.of redeemable preference shares
4. Qualification shares of a director and their remuneration.5. Particulra about directors and managing directors
6. Minimum subscription for shares
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Contents of prospectus
7. The timing and opening of subscription list.
8. The amount payable on application and allotment of share.
9. Particulars of any option to subscription for shares.
10. Shares issued for consideration other than cash.
11. Premium on shares issued within 2 years preceding the date
of prospectus.
12.Name of underwriter
13.Underwriting commission
14.Particulars of vendors of property purchased or proposed to
be purchased by the company.
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Contents of prospectus
15.Preliminary expenses and issue expenses and to whom payable.
16.Any benefit given to promoters within last two years or proposed tobe given and the consideration for giving the benefit.
17.Particulars of contract other than those into the ordinary course of
business.18.Particulars of auditors.
19.Nature of interest of every director or promoter
20.Voting or dividend rights.
21.Length of time of business.
22.Capitalisation of profits and surplus from revaluation of assets.
23.Specification of time and place for inspection of balance sheet andP&L Account.
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Audit Report and accounts
The prospectus has to set out audit report by auditors and a
report by the accountants on the profit and loss in the
business for the past 5 years. If the proceeds of the issue are to be utilised for purchase of
shares of another company a similar report on accounts of the
subsidiary company has to be set out in the prospectus.
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Preliminary expenses
If the company is less than five years old accounts have to be
given only for the number of years the company has been in
commercial operation.
If prospectus issued is more than 2 years after thecommencement of business, particulars of signatories to the
memorandum and the shares subscribed for by them and
details of preliminary expenses need not be given.
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Consent of experts
Sections 57 and 58 stipulate that experts ( an engineer, valuer
or accountant)whose statements are included in the
prospectus should be unconnected with the formation andmanagement of company and his consent should be obtained
to issue of prospectus containing a statement by him.
An investor is protected by making expert a party to the issue
of prospectus and making him liable for any untrue statement
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Offer for sale by issue house
Section 64 of Companies Act provides that offer for sale of
shares to publics deemed prospectus.
The document deemed to be prospectus has to state the net
amount received by the company to which offer relates andindicate where the contract for allotment to issuing house
may be inspected,
For the purpose of registration the issue house is the deemed
director and should sign the prospectus.
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Transparency of the prospectus
A prospectus should make full frank and honest disclosure of
all material facts with accuracy.
The prospectus should not omit any relevant information.
The companies Act makes directors, promoters and expertsliable for any misstatement of a material fact in a prospectus
or if any material fact is omitted.
Liability for misstatements in a prospectus may be civil or
criminal liability
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Civil liability (sec.62) for misstatements
in prospectus
Any omission from the prospectus of a matter required to beincluded by section 56 may give rise to an action for damageat the instance of a subscriber for shares who has sufferedloss.
Under the general law the subscriber to shares or debenturescan hold all signatories to a prospectus liable in fraud whenthey make a statement to be acted upon by others which isfalse and is made knowingly without belief in its truth orrecklessly not caring whether it was true or false.
The resort to general law can be made where the right againstthe company is lost either through lapses or negligence orwhere the company goes into liquidation.
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Criminal liability for misstatements in
prospectus.
For any untrue statement in the prospectus every person whoauthorised the issue of prospectus is punishable withimprisonment of two years or with fine of Rs.5000.
Issuing application for shares or debentures without a
prospectus attracts a fine of Rs.5000.
Section 68 provides that persons who induce fraudulentlyothers to invest or underwrite shares are punishable withimprisonment for five years or fine of Rs.10,000/.
Application in fictitious names for allotment or registration of shares is punishable with imprisonment for five years.
Prospectus and application for shares should contain theprohibition against application in fictitious name.
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Shelf prospectus
Shelf prospectus valid for 365 days subject to updates on
material facts, material litigation and changes in financial
position between previous offerings and next one.
The facility is limited to PSBS and Fis and those companies
specialising in infrastructure finance.
This allows the issuer to strike quickly when a window opensin the market by immediately offering the pre-registered
securities to any investment banker.
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Fast track mechanism
Fast track issue mechanism allowed by SEBI enables listed
companies to proceed with follow on public offering/rightissue by filing a copy of Red Herring prospectus/prospectus
with RoCs or letter of offer filed with designated stock
exchange.
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Offers for sale
These are offers through the intermediary of
issue house/merchant banker.
The company sells entire issue of shares ordebentures to the issue house at an agreed
price which is generally below the par value
and the shares are resold by the issue house
to the public.
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Bought out deals
Bought out deal is a mutual agreement between the
merchant banker, sponsor and the company and no party can
take unilateral action.
It involves a deal where entire equity or related security isbought in full or in lots with the intention of off-loading it later
in the market.
The shares are held by sponsor till they are ready for public
participation.
BoDs eliminate retailing thereby saving time and cost.
These are the cheapest and quickest source of finance for
small and medium companies.
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Bought out deals
BoDs convert a fee based activity into a fund
based activity of merchant bankers.
BoDs also help entrepreneurs not confident
enough to tap the capital market directly.
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Private Placement
The direct sale of securities by a company to institutional investors
is called private placement.
In private placement no prospectus is issued. It is assumed that
investors have sufficient knowledge and experience to be capable
of evaluating the merits and risks of the investment.
The issuers could be public limited companies or private limited
companies.
Investors include UTI,LIC,GIC,SFC and pension and insurance funds.
The intermediaries are credit rating agencies and trustees and
financial advisors such as merchant banks. These play a vital role
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Private placement
Private placement has advantages of speed, low cost and
confidentiality.
The confidentiality helps pvt.ltd companies and closely heldcompanies which do not want to make public issues for fear of
take over ,wealth tax hassles and institutional interference.
Some companies are too small for public issue as the public
issues are costly.
The most widely used instrument in private placement is NCD
They are preferred by investors as they are stable and give
assured yield.
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Private placement.
Private placement market is highly informal
market.
It is not regulated by SEBI
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Private equity funding
Companies started looking for private equity funding
opportunities as raising capital through primary market is
expensive.
Private equity can be in the form of equity, bonds, debenturesand preference shares.
In mid eighties institutions like UTI,GIC,provided term loans as
well as equity for grass root projects and expansion purposes.
Subsequently Mutual Funds came to be an important source
of equity funding. After liberalisation the entry of private
sector MFs gave a further boost to private equity funding.
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Private equity funding
NRIs also provide private equity and generally tend to prefer
unlisted companies.
Entry of FIIs constituted a further breakthrough in sourcing of
private equity. Private equity is to companies taking into and account their
trading volumes, level of floating stock , purpose for which
additional are being raised.
Private equity funds look for capital gains through project
growth and a clear exit strategy between 3-7 years from
original investment.
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Private equity funding
The value of shares to be acquired by private equity funds is
calculated on the basis of average price earnings multiples
during the past 3 years on a post tax basis .This is in
accordance with international practice.
The rate of return expected by private equity fund is about
25%p.a.
Private equity funding has the potential of becoming the first
stage funding of a project followed by a public issue after the
project is implemented.
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Grey market
Shares of several companies are sold by promoters six to eight
months before the actual public issue.
Such sales are illegal as they are not sold through prospectus.
They are not private placement business.This is popularlyknown as grey market wherein trading of security takes place
before it is officially listed.
The grey market cannot exist without the active connivance of
and promoters. They sell shares out of their quota and profit
from any premium collected.
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Any questions please?